Is the Commonwealth good for British business?

LIKE ALL AUSSIES, I love the Commonwealth Games, although it was better when I was a student and could actually spend two weeks of my life watching them. It’s a chance to see more international competition in Commonwealth-friendly sports like netball and rugby, and of course both England and Australia tend to be happy about their place in the medal table. But, aside from the Games, does the Commonwealth provide economic opportunities for British business? The answer can be summed up in one word: India.

The Commonwealth, comprising the UK and 52 other countries – virtually all of which are former colonies – is an organisation that has struggled for relevance in a post-colonial world, and the games are one of the few things it does that generates enthusiasm among the Commonwealth public. Recognising this, the organisation focuses its energies on areas where it can make a difference, and where it has a capability that other international organisations do not.

One such area that notionally draws its incredibly diverse members together is shared values. The Commonwealth’s official values of democracy, freedom of expression, good governance and the rule of law should auger well for growth prospects: there is a substantial body of academic research that supports the notion that all are useful – although not necessary – conditions for economic growth. However, there are two awkward facts for the UK and the Commonwealth.

The first is that its members are far from paragons of good governance and strong institutions. In our global ratings, The Economist Intelligence Unit rates most Commonwealth countries poorly for political efficacy, and gives them a high risk rating when it comes to legal and regulatory processes. It’s hard to compile a list of ten Commonwealth countries where a foreign firm could really be confident of a level regulatory playing field and a fair hearing in the courts.

A second awkward fact is that once measures of governance and institutions have been accounted for, most research finds that being a former British colony has, at best, a neutral effect on economic growth. There is a range of factors that might explain this, but what is clear is that a focus on good governance and effective institutions will generate economic opportunities in the long run, and that there is no special effect beyond this from being a British colony. This makes it even more damning that governance is so poor in most Commonwealth countries.

If the nature of the Commonwealth isn’t providing inherent growth opportunities, should businesses still pay attention because of its economic heft? After all, the Commonwealth has a population of more than two billion. It turns out that, because most Commonwealth countries are so poor, the economic opportunities in the average member country are pretty small. In 2014, The Economist Intelligence Unit estimates that the Commonwealth will have a GDP of $10.9bn (£6.5bn), or about 14% of the global total. The UK will be the biggest Commonwealth economy, at $2.8bn. Two-thirds of the rest of commonwealth GDP is made up by just three countries: India, Canada and Australia.

Shared historical and cultural links are not providing UK business with a trade advantage either. A report by the House of Commons Library estimates that in 2011, Commonwealth countries accounted for 11% of the UK’s imports and 9% of exports. India, Canada, Australia and South Africa account for just over 60% of this. Is that more or less than we might expect from a random group of countries? It’s roughly neutral. The Commonwealth accounts for 11% of global GDP (excluding the UK), and so is providing economic opportunities for the UK roughly in line with its size. Given that many of the economies are physically distant from the UK and are not members of the same free-trade area, perhaps this does suggest some positive impact of Commonwealth ties, but it’s far from decisive.

Does this mean that UK business should not pay the Commonwealth any special attention? Not at all, and the reason for this is India. By 2030, The Economist Intelligence Unit thinks that India’s economy will be well over ten times larger than it is now, and four times larger than the UK’s. We expect the 2020s to be a golden decade for India, with GDP growth averaging 7.4% a year. With forecast population growth of just 0.9% a year in that period, this time growth will be about investment and productivity, and per capita GDP will also increase at a rapid clip. Unlike India’s boom in the 2000s, this one will be long-lived, with growth averaging 6.7% a year in the 2030s and 5.7% in the 2040s. This will leave India’s economy more than three times as big as that of the US in 2050. India will remain a difficult place to do business, and there will be plenty of downside as well as upside risks in the decades ahead.

Nonetheless, if the Commonwealth was ever going to provide a big opportunity for UK business, this is it.

Simon Baptist, Chief Economist, Economist Intelligence Unit